If you are selling goods or products online and some of your customers are located in Ohio, you need to be aware of the state’s Internet sales tax rules. Collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Ohio is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state. However, Ohio has special rules that apply to certain larger Internet sellers that make them subject to sales tax laws even without a physical presence in the state (see Ohio’s Amazon law, below).
Examples of Physical Presence
Example 1: You are an online retailer located in Lincoln, Nebraska and make a sale through your website to a customer in Dayton, Ohio—a state where your business has no physical presence: You are not required to collect sales tax from the Dayton customer (unless you fall under Ohio's Amazon law).
Example 2: You are an online retailer operating solely out of an office in Cincinnati, Ohio and make a sale through your website to a customer in Toledo, Ohio: You are required to collect sales tax from the Toledo customer.
Example 3: After several years of operating solely out of a warehouse in Lincoln, Nebraska, you open a one-room satellite office just outside of Columbus, Ohio—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Cleveland, Ohio: You are required to collect sales tax from the Cleveland customer.
Under a law that went into effect on July 1, 2015, certain larger Internet sellers with no physical presence in Ohio must collect and pay Ohio’s sales tax. More specifically, an out-of-state seller must collect sales tax from Ohio customers if that seller:
Similar laws have been enacted in other states; they are commonly referred to as Amazon Laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws are enacted to try to reduce this loss.
Another part of the 2015 law deals with so-called affiliate nexus. In short, if an out-of-state seller has a person (affiliate) in Ohio who works in certain specific ways with the seller, then the seller is presumed to have substantial nexus with Ohio for sales tax purposes. If you work with a person in Ohio to help sell, store, or service your products, check Section 5741.01(I) of the Ohio Revised Code.
Ohio’s sales tax statutes do not specifically define physical presence. However, it seems that the default physical presence rule as described in Quill applies, other than for sellers who fall under the state's Amazon law. There is a Ohio Department of Taxation DOT FAQ page on sales and use taxes states that: “If an out-of-state seller has sufficient contact with the state (nexus), the seller is required to abide by Ohio's tax laws,” and that: “Examples of activities that create nexus are: regularly having employees or other individuals operating in the state; making regular deliveries of tangible personal property into this state; or any other physical presence in Ohio.”
In a 1996 case, the Ohio Supreme Court affirmed the physical presence rule from Quill as the standard for requiring a business to collect and remit sales tax. In addition, the DOT in a 2005 Tax Information Release affirmed that “Quillrequires physical presence for sales and use tax nexus,” and the "Ohio Supreme Court relied upon the language inQuill that the physical presence standard applies . . . to sales and use taxes.”
Some items sold via the Internet to Ohio customers may be exempt from sales tax under Ohio law. For example, most food that is not eaten on the premises where it is sold is exempt from sales tax. For more information, check out theFAQ page on sales and use tax published by the DOT. Alternatively, you can review ORS 5739.02 in its entirety.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. Basic additional guidance on the use tax is available from the DOT’s FAQ page on sales and use tax. Among other information, the FAQ page answers the question of whether sales or use tax is due specifically on Internet purchases, by stating “If the seller is not located in Ohio and does not have substantial nexus with Ohio, the seller cannot be required to collect and remit Ohio use tax. However, the purchaser will still owe Ohio use tax on the purchase of goods or services, unless the purchaser has a statutory basis for claiming exception or exemption.”
At the federal level, Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous version, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses (that don't fall under Ohio's Amazon law), it is the long established physical presence rule that will apply to collecting sales tax in Ohio. However, the issue is contentious and evolving, as demonstrated by the Amazon law enacted in Ohio in 2015. Because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Ohio Department of Taxation to see if the rules have changed.
Updated: April 14, 2016